There are positive indications from bilateral
creditors and donor agencies

By SHAMIM
AHMED RIZVI
Islamabad Nov 05 - 11, 2001

While painting a rather dismal picture of
Pakistan's present state of economy, the governor, State Bank of
Pakistan, in his lecture on "Global Economic Outlook" at the
Government College Lahore, last week, expressed hope for a welcome
change in country's economic scenario in the near future "thanks
to government policy decision to join the international community in
the fight against global terrorism".

The Governor, Dr. Ishrat
Hussain, said that
Pakistan was expected to receive financial assistance of about $800
million mostly in the shape of grants from the USA and other donor
nations in the near future. He further sounded optimistic about relief
partly in the form of grants and partly by way of restructuring in
respect of the outstanding multilateral loans of $16 billion.

In the aftermath of September 11 events in the
Washington and New York and Pakistan joining the US led war against
terrorism, various initiatives have been taken by the International
community and institutions to provide a measure of relief to the
economy of Pakistan. The steps so far taken include lifting of
sanctions by the USA, Japan, UK and Germany, liberal rescheduling of
past loans, increased access to the markets of developed countries
grants and aid for balance of payment and budgetary requirements in
moderate amounts besides promises of soft term Liberal Loans from
International Institutions.

In order to apprise the nation about the net impact
of the crisis and the response of the International community, the
Finance Minister, Shaukat Aziz, held a press conference in Islamabad
last week where he disclosed that the minimum loss would be $ 800
million if the crisis persists for a short period but it may increase
to between $ 1 and 2 billion if the current campaign continues till
the end of the financial year. The negative effect would originate
from reduction in revenues, exports, imports, delay in privatization
and fall in foreign direct investment. As regards relief commitments
Pakistan has so far been offered $ 781 million for covering its
economic losses during the ongoing crisis with the highest package of
$ 673 million coming from the USA, Japan, EU and UK, would contribute
$ 25 million, $ 45 million and $ 38 million respectively. All of this
amount consists of grants, deliverable in cash and would be provided
as part of the budgetary support by June 2002. Also, Pakistan was
given to understand that grant assistance would continue in the next
fiscal. Canada has already converted its $ 285 million loans into
social sector funding, which virtually amounts to writing off the
liability. UK has also declared concellation of Commonwealth
Development Corporation loan" amounting to 24 million pounds.
Shaukat Aziz added that major debt relief was expected from Paris Club
as bilateral creditors looked very supportive this time. Besides,
Pakistan was negotiating foreign loans on concessional terms. In this
regard, he referred to PRGF looked foreign PRGF and World Banks
banking sector loan.

The Finance Minister also furnished, for the first
time, latest foreign debt figures till September 2001. Total foreign
debt had accumulated to the tune of $ 37 billion which included
bilateral debt of $ 12.5 billion, while $ 15.4 billion were owed to
World Bank, IMF, Asian Development Bank and Islamic Development Bank.
As regards bilateral debt, Pakistan owed $ 5 billion to Japan, $ 3
billion to USA, $ 1 billion each to Germany and France, $ 318 million
to Canada, $ 738 million to Korea, $ 175 million to Italy, $ 127
million to Sweden, $ 103 million to Russian and $ 80 million to the
Netherlands. Other borrowings included $ 500 million from Paris Club
and $ 751 million from foreign banks. Besides, $ 5 billion were in the
shape of dollar deposits and Euro bonds. Against this backdrop,
according to the Finance Minister, Pakistan was seeking debt relief
from various sources to create fiscal space and reduce poverty from
the country.

In his unusual interview to PTV the President Gen.
Pervez Musharraf, enthusiastically listed the economic benefits,
beginning with the European Union decision to remove duty and increase
quotas for Pakistani products, which, he went on to explain, will
increase exports, leading to the setting up of new industries and
creation of jobs. On the more crucial question of debt relief too he
had good news to offer, promising that bilateral debts, owed mainly to
the US and Japan, would be written off. He rightly advised the public,
though, to be patient in seeing such an outcome. But the then
president himself conceded only about $ 8 billion out of the country's
total $ 38 billion outstanding international debt has been obtained on
a bilateral basis from the US and Japan — another $ 4 billion is
owed to some European countries, South Korea and Canada on the same
basis — all the rest is to be paid back to multilateral
institutions, whose charter precludes debt write-offs. However, it is
also true that the developed nations such as the US and Japan, being
the major contributors to these institutions, also have a say in
determining their policies. And if they really want they can indeed
bring about necessary change in the rules not just to lighten
Pakistan's economic burden but also to act in accordance with a
growing international recognition that the idea of global economy can
be strengthened on if the donor organisations decide to address the
issue of world wide poverty by taking the single most important step
of freeing poor countries from their crushing debt liabilities.

There is almost a consensus amongst the economists
that the cost would had been horrendous, had Gen. Musharraf not taken
the right decision at the right time. This is an example of how a
single decision can change the destiny of a nation. We have been
presented with another opportunity to fully integrate into the world
economy on very attractive terms. We can build a future for our
children as full participants in the world community.

In the first phase, lasting the next six months,
the economic imbalances that have bedeviled the economy will be
removed. Several important developments are taking place. First, the
international focus on the havala trade is going to greatly increase
the official home remittances of the overseas Pakistanis through the
banking channels. It is estimated that three to four billion dollars
were being channeled through havala to finance the Afghan trade.

This colossal amount has to find a new home and
investment havens. Majority of this amount will now be channeled to
Pakistan through the banking system ad will be initially invested in
real estate and other liquid investments like the stock market. The
first impacts are already visible in the shape of rising value of
slight improvement in the real estate markets of the country. If this
amount becomes a permanent feature of Pakistan's external inflows, our
persistent balance of payments shortfalls would effectively be over.
For the first time the country would be in a position to provide
external finances for its development program without external
borrowing.

In the medium term timeframe, lasting from six
months to three years we should expect a major boost in our exports.
If we are able to negotiate, as is likely, a quota free and duty free
access to the American, European and the Japanese market, we will
definitely see an era of unmatched economic growth in the country led
by exports.

The EU has been the first to grant an increase of
15 per cent in quota and duty abolition. But this was something that
was under discussion prior to the September 11 events. While any
concession is welcome, a substantial increase or abolition of the
quota is needed. We should be aware that there is a quota mafia in the
country which would suffer major losses if quotas were removed. We
have to ensure that the quota mafia should not be able to influence
our negotiations with the USA on this score.

If quota restrictions are removed and duties are
eliminated it should not be difficult to double our exports in the
next three years. This will add three to four per cent to our economic
growth rate and push the overall rate beyond sex to seven per cent The
added employment and wealth creation would have a secondary impact on
domestic demand and the long drawn out economic stagnation will come
to an end.

In the longer term timeframe of three to ten years,
reconstruction of Afghanistan and opening up of oil and gas
development in Central Asia will be an unparalleled opportunity for
Pakistan. A huge infrastructure development effort encompassing
Central Asia, Afghanistan and Pakistan involving billions of dollars
would be undertaken with all its magnificent benefits for the people
of Pakistan and Afghanistan. This effort will continue to fuel our
economic growth well into the next decade. The opportunities are so
immense and the stakes are so high that we have to ensure that nothing
jeopardizes the emerging opportunities.